Wednesday, May 21, 2008

The oil price problem is a dollar problem

The price of crude oil keeps going up, and we read in the press dark forecasts for the world economy. Are these warranted? Let us see whether the price of crude oil also increases in an other currency, say the euro.

Year$$ change€ change

Sources: FRED and US Dept. of Energy. I used data closest to May first, to prevent seasonal factors from mattering. Data is nominal, as inflation differentials are an order of magnitude smaller than the changes we see here (which are %age changes from 2000).

What do I read from this first table? That more than half of the increase in the dollar denominated price of crude oil is due to the weakness of the dollar, and less than half to the actual increase of oil prices. So much for blaming China and India, the real culprit is the US dollar. But crude oil prices are not really what matters to an economy, it is rather the price of the end product, the gas that fuels engines. So let us look at the price for a gallon of gas, around May first, in the United States and in Germany, the largest European economy.

YearUS $US $ changeGerm. €Germ. € changeGerm. $Germ. $ change

Sources: FRED and US Dept. of Energy.

We can see clearly that gas prices have increased much less in Germany in euro terms than anywhere in dollar terms. Two thirds of the US increase can be attributed to the weak dollar.


Independent Accountant said...

We agree. I've been saying this for years.

Vilfredo said...

I find it interesting that taxes do not seem to have an impact on the % change. Indeed, gas tax is significantly higher in Germany, and as it is a lump sum tax, if the price before tax increases in the same proportion in dollars in both countries, then the after tax increase should proportionally higher in the US than Germany. But no.

I had heard the argument before that this was one reason that Europe was feeling less the price increases.

aflakete said...

2 things:

A 176% increase of crude oil prices is a lot less than 376% but not small either. There is an oil price problem even without the dollar depreciation.

As far as the price of a gallong of gas, Germany may have a higher demand elasticity (through public transport infrastructure and stuff) and may be a higher supply elasticity which could have reduced the price hike.

Economic Logician said...

Aflakete, your point is well taken. But the price of crude is not what matters for businesses and individuals. This is why I provide the second table, where the increase in German gas prices is only 46% over 8 years. Factor in about 16% overall inflation, the remaining 30% over 8 years, or 3.3% a year, is not dramatic.